Banks' lending to derivatives may be restricted
Mumbai: The Reserve Bank of India (RBI) is likely to restrict banks' exposure to derivatives.
According to banking sources, the RBI may link banks exposure to derivatives to their respective net worth, similar to the exposure to capital market due to concerns over excessive exposure of some banks to the derivatives market (non-fund based exposure) while maintaining very small fund-based exposure.

The ceiling would be over and above the existing norms relating to banks' exposure to the derivatives market. Currently, derivatives are covered by the individual and group exposure norms.

Derivatives positions also attract capital adequacy norms based on the conversion of the exposure into credit equivalent as stipulated by the RBI.

As per the data released by the RBI in its trend and progress report, contingent liabilities (which include derivatives market exposure) of foreign banks had gone up by 60 per cent from Rs15,90,636 crore in 2004-05 to Rs25,54,165 crore in 2005-06.

The new norms may also require the banks to disclose the risks in the derivative deals on the balance sheet either in the form of notes to accounts or balance sheet items. The banks may have to mark-to-market these deals as well.
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